Economic growth appears to be strengthening across the large economies, but that does not mean financial-sector regulation can now be relaxed. On the contrary, it remains more necessary than ever, as does international cooperation to ensure the safety and resilience of global capital markets. That is why the Group of Twenty (G20) finance ministers and central bank governors reiterated their support for continuing financial-sector reform at their meeting in Baden-Baden last week. (more…)
By José Viñals
Brisbane and Basel may be 10,000 miles apart, but when it comes to financial regulation the two cities will be standing cheek by jowl.
At the next summit of the Group of Twenty advanced and emerging economies, to be held in Brisbane in November, political leaders will take the pulse of the global financial regulatory reform agenda, launched five years ago. The explicit goal of the Australian G-20 presidency is to finally complete these essential reforms. As Prime Minister Tony Abbott said today in Davos, “Financial regulation is always a work-in-progress, but these reforms now need to be finalized in ways that promote confidence without eliminating risk.”
I strongly support this extra push to create a safer financial system that can better support the needs of the real economy, and better protect taxpayers. For far too long, critics have been able to portray the G-20 reform agenda as a regulatory supertanker stuck in the shallow waters of technical complexity, financial industry pushback, and diverging national views. This image is increasingly off the mark.
The global regulatory landscape governing banks has changed from its pre-crisis status quo.
In addition to the Group of Twenty advanced and emerging economies led global regulatory reforms, like Basel III, the United States and the United Kingdom have decided to directly impose limits on the scope of banks' businesses. The European Union is contemplating a similar move.
We discussed these structural banking reforms a few weeks ago with officials from finance ministries, central banks, and supervisory authorities from around the world during the IMF and World Bank Spring Meetings. The design and implementation of these measures will have implications for global financial stability and sustainable growth, so we wanted to bring people together for the first global debate of the issue with G20 and other countries.
It is still winter in the northern hemisphere, but there is never a bad time for spring cleaning. I suggest that policymakers de-clutter their to-do lists by focusing on three priorities. These policies will help economies grow and will significantly improve financial and monetary stability in 2013 and beyond.
In response to the global crisis, policymakers around the world are instituting the broadest reform of financial regulation since the Great Depression. Some in the financial industry claim the long run economic costs of these global reforms outweigh the benefits. But our new research strongly suggests the opposite—the reforms are well worth the money.
Folklore is riddled with tales of a lone actor undoing a titan: David and Goliath; Heracles and Atlas; Jack and the Beanstalk, to name a few. Financial institutions seen as too important to fail have become even larger and more complex since the global crisis. We need look no further than the example of investment bank Lehman Brothers to understand how one financial institution’s failure can threaten the global financial system and create devastating effects to economies around the world. We’ve been looking at how to fix the too important to fail problem, and favor market based measures to help reduce the likelihood and impact of a failure. Global regulators have come up with a new set of tighter rules for all banks, known as Basel III, as a starting point to make the system less risky and address a number of regulatory issues. Implementation may take several years, however, while systemic institutions continue to grow in size and complexity, and may resume their risky practices. So in the interim, we’d like to see rapid, credible, and visible actions.
The near collapse of the financial system that set off the global crisis was due in part to financial institutions suddenly lacking access to funding markets, and liquidity drying-up across securities markets. Financial institutions did not factor in how their own responses to a liquidity shortfall could make the entire system shut down. But, it only takes a few institutions to pull the plug on a liquidity-filled bathtub before it runs dry, and the central bank needs to open the spigots again. The key then is to make sure that firms have less incentive to pull the plug. To do that, in the latest Global Financial Stability Report, we have come up with a way to measure how much an individual financial institution contributes to system-wide liquidity risk.